Inventory Strategies Yield Uneven Results

Dec. 21, 2004

Collaborative inventory-management strategies can reduce inventory levels throughout a value chain, the IW survey results indicate. However, the effectiveness of a given strategy varies from industry to industry, observes Barbara Rosenbaum, an associate director with Ernst & Young's global supply-chain practice. "Where inventory management techniques are working," she says, "it is a situation where information is replacing inventory." The most commonly used inventory- management practices -- deployed with either suppliers or customers -- are just-in-time delivery, vendor-managed inventories, and real-time inventory tracking. A few less widely embraced strategies -- such as CPFAR (collaborative planning, forecasting, and replenishment), cross-docking, and merge-in-transit -- are catching on in certain industry sectors and making a difference for firms that have learned to master them. Analyses of the survey data show that, in most cases, adoption of supply-side inventory strategies tend to reduce raw material inventories below the all-company median level -- which is 30 days' worth. But, as might be expected, initiatives directed toward suppliers tend to have little impact on finished-goods inventory levels. While some strategies result in real inventory reductions across the value chain, others "merely decrease inventory at one point in the value chain while increasing it at another," Rosenbaum points out. For three strategies -- consignment inventory, resident supplier programs, and vendor-managed inventory -- the survey data reveal that consumer packaged-goods firms practicing these techniques with their suppliers have higher inventory turn rates, "while those practicing them with their customers actually have lower inventory turn rates," she observes. "Thus, the inventory is merely being shifted back to the supplier." However, from a value-chain perspective, "there is something to be said for pushing inventory upstream," observes Chapman Kistler, a partner in Ernst & Young's consumer products and retail consulting practice. The upstream inventory, he notes, tends to represent less value-added (and, hence, lower carrying costs) and it is less prone to obsolescence. "It might be bad for the upstream company, but it is ultimately good for the value chain." Two industries where cross-docking is making a difference, Rosenbaum notes, are automotive and industrial-equipment manufacturing. In cross-docking, materials arriving at a warehouse move directly from the receiving dock to a shipping dock -- avoiding the inventory buildup associated with accumulation of goods at the warehouse level. Automakers, for example, use cross-docking to improve transportation efficiency in the shipment of parts. The most dramatic evidence that cross-docking can be significant, she points out, emerges from an examination of the data for the best-performing companies. For example, the top 25% of the automotive firms that have adopted cross-docking turn inventories at least 40 times a year, compared with 25 turns or more for the top quartile of all auto-industry respondents. A similar slicing of the survey data for high-tech firms found that companies that have effectively implemented merge-in-transit techniques "are experiencing significantly lower inventory levels" than other firms in that sector. With merge-in-transit, components ordered from suppliers are brought together at a merge hub, consolidated, and then shipped to customers. "The top quartile for the industry as a whole reported inventory turns of 12 or greater," Rosenbaum notes, "whereas the top quartile of those using merge-in-transit reported inventory turns of 32 or more." One-fourth of the respondents indicated that their firms practice CPFAR, in which the objective is "for both supplier and customer to share information on demand and product availability, so that each can plan more effectively." While the overall survey data don't reveal much evidence that CPFAR is having a significant impact on inventories, a close-up look at responses from the consumer packaged-goods sector shows that leading companies in this industry are getting a real benefit. For example, the top quartile of consumer-goods firms that practice CPFAR with their suppliers turn their annual inventory at least 21.5 times a year, compared with 17 inventory turns or better for the top 25% of the industry as a whole -- and a median of eight turns for all participants in the IW survey. "This shows," Rosenbaum says, "that a company that learns to do CPFAR well can achieve significant results."

Where Supplier Strategies Reduce Inventory Levels

Denotes inventory level below the median for the total survey.

Strategy practiced with suppliers Median raw-material days on hand Median finished-goods days on hand
JIT delivery 25 days 15 days
Kanban systems 25 days 13 days
Real-time inventory tracking 28 days 15 days
Resident suppliers 25 days 15 days
Vendor-managed inventory 25 days 15 days
CPFAR 30 days 14 days
Consignment inventory 21 days 15 days
Synchronized supply/demand planning 25 days 15 days
Cross-docking 24 days 15 days
Direct-store delivery 23 days 14 days
Merge-in-transit 30 days 15 days
ALL-COMPANY MEDIAN 30 days 15 days

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